BUSE 608

International Business
KAAU, 2011-12

Topic 7: International Market Entry Strategies

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Learning outcomes
Identify and analyse the factors on the basis of which companies can decide;
where to invest (choice of country) when (timing of entry) which product (or portfolio of products) and which mode of entry (exports vs WOS)

Compare and contrast different market entry modes in respect to prevailing business environment, risks and commitment involved

Understand the theoretical background of the internationalisation process/strategy

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Where to invest?

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Where to invest?

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Which foreign market?

All countries
Consumers/user profile, direct estimates of market size, market size indicator

Root, 1994: 28

Political Cultural Economical Social Overall country stability

Preliminary screening
Accept/ reject Rejected countries

Prospective target countries

Top-down estimates Bottom-up estimates

Estimating industry market potentials

Accept/ reject Rejected countries

High-marketpotential countries
Entry conditions, competition audit Distribution channels Consumers/users

Estimating company sales potentials

Accept/ reject Rejected countries

Secondary target markets

Target country

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Timing of entry?
First-mover advantages
First-mover disadvantages
Early entrants

Second-mover advantages Late entrants Factors:

Market situation Customer demand Government policies, etc.

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Which product?
Sales
Life cycle of a generic product Root, 1994: 27

Country D Country C

Country B

Country A

Home Country

Introduction

Growth

Maturity

Saturation

Decline

Time

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Which modes of entry?

Exporting Licensing Franchising Management contracts (Turnkey projects) Collaborative strategies Wholly-owned subsidiary
Greenfield investment Others

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IMEM: Exporting
Indirect exporting Direct exporting Export agents
Advantages and disadvantages

Distributors
Advantages and disadvantages

Foreign sales branch/subsidiary

Advantages and disadvantages

Problems
Managerial and export manager related

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IMEM: Licensing & Franchising

Licensing: Firm grants a licensee exclusive
right to produce and market the product within an agreed area for a period of time in return for a royalty based on sales.
Advantages & disadvantages

Franchising: a specialised form of licensing

in which franchisee agree to abide by the rule as to how it does business
Advantages & disadvantages

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IMEM: Turnkey projects (MCs)

Performance of administrative and technical functions of an operation in return for a fee A mean of exporting process technology to other countries
Advantages and disadvantages

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IMEM: Collaborative entry

Traditional joint ventures (JVs)
Equity participation 50-50, 40-60, 70-30, etc. Sharing of knowledge/ expertise

Strategic alliances
Non-equity partnerships Usually competitors Focus of knowledge sharing and creation High failure rate Learning races

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The joint venture is the most flexible instrument for making fits out of misfits. It will become increasingly important. It is at the same time the most demanding and difficult of all tools of diversification, and the least understood

Alliances as a broad-based strategy will only ensure a companys mediocrity, not its international leadership. No company can rely on another outside, independent company for skills and assets that are central to its competitive advantage. Alliances are best used as a selective tool, employed on a temporary basis or involving non-core activities

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IMEM: Wholly-owned subsidiary

Owning and controlling an operation in a foreign country
Could be marketing operation only or manufacturing and marketing Entry could be Greenfield or Acquisition

International acquisitions Greenfield investment Foreign direct investment

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IMEMs: advantages & disadvantages

Entry Mode
Exporting

Advantages
Ability to realise location and experience curve economies Ability to earn return from process technology skills in countries where FDI is restricted Low development cost and risks

disadvantages
High transport costs, trade barriers, problems with local marketing agents Creating efficient competitors, lack of long-term market presence Lack of control of technology and quality, inability to realise location, experience economies and engage in global strategic coordination Lack of control over technology, inability to engage in global strategic coordination, inability to realise location and experience economies

Turnkey contracts

Licensing Franchising

Collaborative strategies

Access to local partners knowledge, Sharing development costs and risks, politically acceptability

WOS

Protection of technology, ability to engage High costs and risks in global strategic coordination, to realise location and experience economies

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Scale and strategic commitment

Relationship between scale of entry and strategic commitment
Value and risks
International market entry mode WOS/Greenfield WOS acquired Majority JV 50-50 JV Minority JV Resource required Very high High Moderate to hi Moderate Moderate Moderate Low to moderate Low Very low Market specificity High High High High High Moderate Low Low Very low LOI 9 8 7 6 5 4 3 2 1

Impact on
Competition
Existing and new competitors

Export subsidiary Direct export Agent/distributor Licensing/franchisin

Customers First-mover advantage Financial resources, inflexibility

sole venture c o n t r o l Branch export/subsidiary

Joint venture Licensing

Agent/distributor export

Indirect export Risk

(Adopted from Root, 1994: 18)

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Decision framework
Are transportation costs high
Yes No

Import barriers
Yes

No

Export

Is know-how easy to licence

Yes

No

FDI

Yes

Tight control over foreign ops required

No

Yes

Is know-how valuable & is protection possible?

No

License

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FDI or licensing/exporting
Transportation costs Trade barriers Type of FDI Protection of knowledge/expertise Transfer of knowledge Operational, management and marketing control

700 600 500 400 300 200

Exports FDI

100 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

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Theories of internationalisation
Internalisation theory (Buckley & Casson 1976) Location specific advantage theory (Franko 1971; Stopford & Wells 1972) Eclectic theory (Dunning 1980, 1988) Strategic behaviour approach (Harrigan 1985; Kogut 1988) The product life cycle approach (Vernon 1966)

The Uppsala model (Johnson & Vahlne 1977)

Network approach (Hakansson & Johanson 1988)

Born global (Madsen & Servais 1997)

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Summary
Companies would invest in those countries where political, legal and economic risks are minimal Companies internationalise (enter in foreign markets) with products whose demand in home market is in decline Companies prefer to have full control over their foreign operations, if possible Companies would like to enter foreign markets before their competitors to gain first mover advantage...
But .....this is not always the case..

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